America's Small Business Fetish

June 6, 2012

Politicians on both sides of the aisle have long been obsessed with the economic prospects of small businesses. This is because, as the claim often goes, small businesses are the primary drivers of economic growth. Indeed, this reasoning has been the justification for numerous loan programs and targeted assistance to small businesses to lift them up off the ground, says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University.

However, this line of reasoning misses the mark entirely. Contrary to this conventional wisdom, small businesses are not the standard bearers of job creation.

Based on the federal government's bizarre classifications, 99.7 percent of firms in America qualify as "small."

This enormous number of firms employs 50 percent of the American workforce, begging the question of why assistance isn't given instead to the 0.3 percent of businesses that manage to employ the other 50 percent of workers.

Nevertheless, the nation's many small businesses are the fortunate recipients of special treatment in Washington, receiving $30 billion in such loans from the Small Business Administration in fiscal year 2011.

Researchers have found that there is no correlative link between businesses being small and their growth potential. Instead, a much better relationship (and a stronger argument for the primary driver of economic growth) is seen between "new" businesses and their growth potential.

"New" businesses, defined as those being less than a year old, are much more likely to add jobs and contribute to economic growth.

A report by economist Tim Kane of the Kauffman Foundation found that, without startup businesses, there would be no net job creation in the United States.

Other researchers found that businesses younger than a year account for 3 percent of U.S. employment but almost 20 percent of new gross jobs.

Furthermore, 60 percent of small businesses that have been around more than five years actually act as a slight drag on the number of jobs available, regularly cutting positions.

Therefore, assistance from Washington would be better put to use helping "new" businesses. Additionally, it bears thought that relief given to small businesses encourages them to stay small, thereby discouraging the creation of new jobs that might trigger further mandates from the government.